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Investments Dictionary

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EAFE Index
The European, Australian, Far East index, computed by Morgan Stanley, is a widely used index of non‐U.S. stocks.
Earnings Management
The practice of using flexibility in accounting rules to improve the apparent profitability of the firm.
Earnings Retention Ratio
Plowback ratio.
Earnings Yield
The ratio of earnings to price, E/P.
Economic Earnings
The real flow of cash that a firm could pay out forever in the absence of any change in the firm's productive capacity.
Economic Value Added (EVA)
The spread between ROA and cost of capital multiplied by the capital invested in the firm. It measures the dollar value of the :firm's return in excess of its opportunity cost.
Effective Annual Rate (EAR)
Interest rate is annualized using compound rather than simple interest.
Effective Annual Yield
Annualized interest rate on a security computed using compound interest techniques.
Effective Duration
Annualized interest rate on a security computed using compound interest techniques.
Effective Duration
Percentage change in bond price per change in the level of market interest rates.
Efficient Diversification
The organizing principle of modern portfolio theory, which maintains that any risk averse investor will search for the highest expected return for any level of portfolio risk.
Efficient Frontier
Graph representing a set of portfolios that maximize expected return at each level of portfolio risk.
Efficient Frontier of Risky Assets
The portion of the minimum‐variance frontier that lies above the global minimum‐variance portfolio.
Efficient Market Hypothesis
The prices of securities fully reflect available information. Investors buying securities in an efficient market should expect to obtain an equilibrium rate of return. Weak‐form EMH asserts that stock prices already reflect all information contained in the history of past prices. The semistrong‐form hypothesis asserts that stock prices already reflect all publicly available information. The strongform hypothesis asserts that stock prices reflect all relevant information including insider information.
Elasticity (of an option)
Percentage change in the value of an option accompanying a 1% change in the value of a stock.
Electronic Communication Network (ECN)
A computer operated trading network offering an alternative to formal stock exchanges or dealer markets for trading securities.
Endowment Funds
Organizations chartered to invest money for specific purposes.
Entry Age Normal (EAN)
A method under which the present value of future benefits of each individual included in an actuarial valuation is allocated on a level basis over the earnings or service of the individual between entry age and assumed exit age(s). The portion of this present value of future benefits allocated to a valuation year is called the normal cost. The portion of this present value of future benefits not provided for at a valuation date by the present value of future normal costs is called the actuarial liability.
Ownership shares in a firm.
Ownership in a firm. Also, the net worth of a margin account.
Equivalent Taxable Yield
The pretax yield on a taxable bond providing an after‐tax yield equal to the rate on a tax exempt municipal bond.
Dollar-denominated deposits at foreign banks or foreign branches of American banks.
European option
A European option can be exercised only on the expiration date. Compare with an American option, which can be exercised before, up to, and on its expiration date.
European, Australian, Far East {EAFE) index
A widely used index of non‐U.S. stocks computed by Morgan Stanley.
Event Study
Research methodology designed to measure the impact of an event of interest on stock returns.
Event Tree
Depicts all possible sequences of events.
Excess Return
Rate of return in excess of the risk‐free rate.
Exchange Rate
Price of a unit of one country's currency in terms of another country's currency.
Exchange Rate Risk
The uncertainty in asset returns due to movements in the exchange rates between the dollar and foreign currencies.
National or regional auction markets providing a facility for members to trade securities. A seat is a membership on an exchange.
Exchange-Traded Funds (ETFs)
Offshoots of mutual funds that allow investors to trade portfolios of securities just as they do shares of stock
Exercise or Strike Price
Price set for calling (buying) an asset or putting (selling) an asset.
Expectations Hypothesis (of interest rates)
Theory that forward interest rates are unbiased estimates of expected future interest rates.
Expected Return
The probability‐weighted average of the possible outcomes.
Expected Return-Beta Relationship
Implication of the CAPM that security risk premiums (expected excess returns) will be proportional to beta.

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